Andualem Temesgen
Andualem Temesgen
February 2018,
February 2018,
i
ADDIS ABABA UNIVERSITY
SCHOOL OF GRADUATE STUDIES
COLLEGE OF LAW AND GOVERNANCE STUDIES
BUSINESS LAW STREAM
Name Signature
2. ____________________________________ _______________________
ii
Declaration
I, the undersigned, declare that the thesis comprises my own work, has not been presented for a
degree in any other University and that all sources of materials used are aptly acknowledged.
Name_Andualem Temesgen
Signature ______________
Addis Ababa University
February, 2018
Confirmed by: -
iii
Table of Contents
Title page ………………………………………………………………………………………..................i
Thesis approval page …..............................................................................................................................ii
Declaration..................................................................................................................................................iii
Table of Contents ....................................................................................................................................... iv
Acknowledgement ...................................................................................................................................... vi
Acronyms ...................................................................................................................................................vii
Abstract.....................................................................................................................................................viii
CHAPTER ONE ......................................................................................................................................... 1
1. GENERAL INTRODUCTION.............................................................................................................. 1
1.1. Background of the Study................................................................................................................. 1
1.2. Statement of the Problem ................................................................................................................ 3
1.3. Objective of the Study ..................................................................................................................... 6
1.3.1. General Objective ..................................................................................................................... 6
1.3.2. Specific Objectives .................................................................................................................... 6
1.4. Scope of the Study............................................................................................................................ 6
1.5. Research Questions.......................................................................................................................... 6
1.6. Significance of Study........................................................................................................................ 7
1.7.1 Research Method........................................................................................................................ 7
7.1.2 Data Source................................................................................................................................. 8
1.7.3 Data Analysis.............................................................................................................................. 8
1.8. Limitation of the Study.................................................................................................................... 8
1.9. Structure of the Study ..................................................................................................................... 9
CHAPTER TWO ...................................................................................................................................... 10
2. LITERATURE REVIEW AND THEORETICAL CONSIDERATIONS....................................... 10
2.1. Introduction.................................................................................................................................... 10
2.2. Definitions of E-Commerce ........................................................................................................... 10
2.3. Historical Background of E-Commerce.......................................................................................11
2.4. Typical E-commerce Transaction................................................................................................. 12
2.4.1. Business-to-Business (B2B) E-commerce.............................................................................. 12
2.4.2. Business-to-Consumer (B2C) E-commerce........................................................................... 13
2.4.3. Consumer-to-Consumer (C2C) E-commerce ....................................................................... 13
2.4.4. Business-to-Government (B2G) E-commerce....................................................................... 13
iv
2.5. Scope of E-commerce.....................................................................................................................14
2.5.1. Indirect E-commerce .............................................................................................................. 14
2.5.2. Direct E-commerce .................................................................................................................14
2.6. Need for Taxation of E-Commerce...............................................................................................15
2.7. International Initiatives on Applying VAT on E- Commerce Transactions.............................16
2.7.1. OECD and Taxation of E-Commerce VAT .............................................................................. 16
2.7.2. European Union VAT Regime in Taxation of E-commerce....................................................19
CHAPTER THREE .................................................................................................................................. 23
3. ETHIOPIAN VAT REGIME IN TAXATION OF E-COMMERCE............................................... 23
3.1. Introduction.................................................................................................................................... 23
3.2. Overview of E-Commerce in Ethiopia .........................................................................................23
3.3. VAT in Ethiopia .............................................................................................................................25
3.4. Taxable Transactions.....................................................................................................................26
3.5. Taxable Activity .............................................................................................................................29
3.6. The Rate of VAT ............................................................................................................................30
3.7. Regulation of VAT on E-commerce Under the Current VAT system ...................................... 30
3.7.1. Registration for VAT .............................................................................................................. 32
3.7.2. Reverse Charge Mechanism................................................................................................... 33
3.7.3. VAT Invoice.............................................................................................................................37
2.7.4. Non-compliance to VAT Proclamation .................................................................................38
3.8. Possible Problems and Challenges Ahead in the Application Ethiopian VAT System on E-
commerce Transactions........................................................................................................................38
3.7.1. Verifying the Details of a Transaction ..................................................................................38
3.7.2. Identifying the Parties to a Transaction................................................................................39
3.7.3. Permanent Establishment ...................................................................................................... 40
3.7.4. Deficiency of VAT Treaties .................................................................................................... 42
3.7.5. Keeping Records .....................................................................................................................42
CHAPTER FOUR..................................................................................................................................... 44
4. CONCLUSION AND RECOMMENDATIONS ............................................................................ 44
4.1. Conclusion ...................................................................................................................................... 44
4.2. Recommendation............................................................................................................................46
Bibliography .............................................................................................................................................. 48
v
Acknowledgement
It is matter of extreme pleasure and pride for me to submit my thesis for the Award of LL.M. in
Business law. In the consummation of this work, assistance, guidance and encouragement have
been received from several persons in different forms. I wish to express my sincere gratitude to all
of them.
First and for most, I would like to thank the Almighty God and His Mother St. Marry for giving
me the courage and health to finish my thesis.
Next, I would like to express my deep sense of gratitude to my learned and respected advisor, Dr.
Taddese Lencho, for his patience in going through the draft of this paper and for his guidance,
support and helpful comments for this paper.
I would like to further extend my appreciation from the panorama of my heart to my family’s
Meba, Kibur, Temesgen, Mintwab, Anchiwa, Ayu, Ati, Addis, for their showering love, affection,
care, motivation and blessing upon me. For without them, I would not have this opportunity.
I also express my sincere thanks to my friends Gech, Tes, and Yite, for their moral support and
motivation during my research work.
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Acronyms
Art. - Article
ATM- Automated Teller Machine
B2B- Business-to-Business
B2C- Business-to-Consumers
B2G- Business-to-Government
C2C- Consumer-to-Consumer
CFA- Committee on Fiscal Affairs
EDI- Electronic Data Interchange
EFIRA- Ethiopian Federal Inland Revenue Authority
ERCA- Ethiopian Revenues and Customs Authority
EU- European Union
GST- General Sales Tax
IP- Internet Protocol
OECD- Organization for Economic Co-operation and Development
PE- Permanent Establishment
TAG- Technical Assistance Group
UN- United Nations
UNCITRAL- United Nations Commission on International Trade Law
UNCTD- United Nations Conference on Trade and Development
US- United States
VAT- Value Added Tax
WTO- World Trade Organization
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Abstract
This study was intended to assess how the current VAT system of Ethiopia is applicable on e-commerce
transactions. The study was guided by the following objectives; analyze the prospects and weaknesses of
the existing VAT law in taxation of e-commerce, take lessons from foreign jurisdictions on how to apply
VAT on e-commerce transactions, and find out the challenges experienced and possible challenges ahead
in the implementation of Ethiopian VAT system on e-commerce transactions.
In order to conduct the research, the study uses qualitative method with the belief that it provides the most
appropriate way of investigating the research questions. The necessary data to the study were collected
from both primary and secondary sources all the way through using a combination of multiple data
gathering instruments including interviews, review of relevant literatures and legislative documents.
The study findings revealed that that there are challenges experienced in the application of the VAT
legislations on e-commerce transactions. This includes, the problems of the buyer’s identification,
establishing his location/residence and its statues (business or consumer) in e-commerce transactions, the
inadequacy of the VAT Proclamation to define PE for e-commerce purpose, the absence of guidelines on
acceptable records where goods are delivered, invoices issued and payments made by electronic means.
Add to these is lack of proper and adequate resources, and their usage within the Tax Authority to monitor
e-commerce transactions.
Using the above findings, it implied that theoretical soundness of the VAT laws would not in itself suffice
for the implementation thereof. Given that electronic commercial activity has been evolving with the
development of technology, its application should also be technology-based. Accordingly, a clear provision
as to what constitute PE for e-commerce purposes should be established, a special scheme, which would
require foreign vendors involved in suppling electronic services to Ethiopian consumer to register should
be established. What is more, for the sake of effective administration and collection of VAT revenue from
e-commerce transactions, the cooperation of the Tax Authority with various stakeholders is advised.
viii
CHAPTER ONE
1. GENERAL INTRODUCTION
Taxation is an integral part of human history, past and present, and the virtually continued in the
future. Taxes are a portion of private wealth, exacted from individuals, groups of individuals, or
other legal entities by the State for the purpose of meeting the expenditure essential to carrying out
the functions of Government.1 It is in effect a contribution designed to reduce private expenditure
in favor of public expenditure. Basically it is the coercive contribution by citizens to the State or
Government, to enable the Government to obtain funds for the provision of goods and services to
its citizens, redistribute income, clear market imperfections and stabilize the economy. It is the
main source of revenue to the Government. 2 A Government that cannot tax cannot survive.
Taxation must expressly be provided for by law and a good tax policy must incorporate all or some
of the canons of taxation or principles of taxation including equity, certainty, convenience,
economy, productivity (fiscal adequacy), simplicity, flexibility, and diversity'.3
Commonly, taxes can be classified into direct and indirect taxes. VAT is one form of indirect tax
in which the tax is typically collected from someone other than the person who actually bears cost
of the tax. On the other hand, VAT is a generic term associated with a multistage tax that is levied
on the value added by each business firm at every stage of production and distribution of goods
and services.4
VAT has been the most pervasive tax reform throughout the world during the second half of the
twentieth century and into the twenty-first century, and has proved to be a major source of
Government revenue. Historically, Americans were the first advocators of VAT.5 However, the
modern notion of VAT to satisfy high demand of revenue on the part of the Government was
1
Carl P., Introduction to Public Finance, 2nd ed., Macmillan Company, New York, 1902, P. 77
2
Id., P. 6.
3
Sol P., International Business Taxation, A Study in the Internationalization of Business Regulation, Quorum Books,
New York, 1992. P. 6.
4
Taddese L., ‘To Tax or Not to Tax: Is That Really the Question? VAT, Bank Foreclosure Sales, and The Scope of
Exemptions for Financial Services in Ethiopia’, P. 265,<http://dx.doi.org/10.4314/mlr.v5i2.4> (Accessed 1 January
2017)
5
Yohannes M. & Sisay B., Tax Law Teaching Material, Prepared Under the Sponsorship of the Justice and Legal
System Research Institute, 2009. P. 63.
1
introduced by France in 1954.6 Traditional value added tax concepts are mainly premeditated to
operate based on the geographic location of the parties or the transactions. These tax points
disappear when business activity is pursued through the internet. 7 Governments therefore are
facing the task of defining new tax points capable of catching online transactions if they wish to
preserve their revenues.8
In Ethiopia VAT is a recent phenomenon which is introduced in 2002 by replacing the then general
‘sales tax law’.9 This law was considered as an essential component of tax reforms of the country
to replace the out dated sales tax, which has served for more than four decades and collected at
manufacturing or production level and/or while importing. Unlike sales tax, VAT is one variety of
taxes imposed on transactions that result in value addition and it is collected from each stage.
It is tough to say that, the VAT law in Ethiopia was written to cater for digital transactions, such
as online downloads of movies, music, games or access to content in the cloud (Internet-based
storage mechanisms). Ethiopian VAT laws were written with a focus on physical goods and in
person services. To date, no amendments have been made to the VAT Proclamation, to ensure that
it specifically provides for the imposition of VAT in e-commerce in a comprehensive manner.
Ethiopia differs from other VAT jurisdictions, because it has not yet introduced a considerable
guidance on electronic commerce or introduced legislative provisions to deal with electronic
commerce efficiently. Traditionally, the current Ethiopian taxing principles must be applied in
determining whether electronically supplied services are subject to VAT in Ethiopia. The question
therefore arises whether the VAT Proclamation in its current form in fact provides for the
imposition of VAT on the supply of digitized products and whether imposing VAT is consistent
with the principles formulated by the OECD and other developed countries.
However, it is worth to note that, the Ethiopian VAT legislation provide a definitive statements
for the global businesses regarding the importation of e-commerce in Ethiopia. Accordingly,
Article 4(7) of the VAT Proclamation envisage an inkling as to the applicability of the
Proclamation to the supply of goods and rendering of services carried out by a nonresident in
6
Ibid.
7
See, e.g., Kortenaar G. & Spanjersberg C., ‘Taxation and E-Commerce: Dutch Tax Policy Implications’, Intertax, 1999,
Vol. 27, P. 180-187.
8
OECD, Electronic commerce: The Challenges to Tax Authorities and Tax Payers, Vol. 4, Nov. 18, 1997, P. 4,
<http://www.oecd.org/daf/fa/e_com/turku_e.pdf> (Accessed 15 January 2017)
9
Sales and Excise Tax Proclamation, 1993, Federal Negarit Gazeta, Proc. No. 68/1993, 52 year, No. 61.
2
Ethiopia through a permanent establishment in Ethiopia or through the internet. 10 This is the
solitary provision that gives a clue as to the application of Ethiopian VAT law on e-commerce.
But, this does not mean that this reference of the Proclamation is sufficient enough to address all
the issues of e-commerce with regard to VAT law regime.
Therefore, this study center itself on the examination of whether the application of current VAT
legislation of Ethiopia on e-commerce transactions will be adequately cater for the state interests.
Besides, assessing the challenges posed in taxation of VAT in e-commerce, together with
recommendations for reform will be made. In doing so, the experience of EU and OECD in
applying VAT regime to taxation of e-commerce will be put forth as arguably the most advanced
in the world and therefore Ethiopia may use its positive experience in regulating the issue.
As mentioned here in above, VAT is one of the most important systems of taxation for the
Government of Ethiopia and the Ethiopian Government continues to be excited at the prospect of
VAT’s ability to generate large amounts of tax revenue.11 According to the Ethiopian VAT
Proclamation, VAT is levied on the sales of goods and services in the territory of Ethiopia, as well
as on imports of goods and services from other countries.12 In respect to exports, the general rule
is that they are not taxed.13 Hence, the country-of-destination principle of taxation, which is
“almost universally employed” for VAT,14 is typically applied in Ethiopia.15
On the other hand, though the present VAT legislation is applicable on e-commerce transactions,
the legislation will not be able to achieve a proper functioning of the VAT system as Ethiopia
experiences the practical difficulties of compliance and enforcement leading to a misallocation of
VAT revenue and the non-taxation of certain transactions. Correspondingly, in practice, the
devotion of the Tax Authority to generate revenue from e-commerce transaction is very marginal.
Thus, the application of VAT on e-commerce transactions is definitely an area that requires proper
10
Value Added Tax Proclamation, 2002, Federal Negarit Gazeta, Proc. No. 285/2002, 8th year, No. 33, [here in after,
VAT Proclamation] Art.7(4).
11
Markos A., Value Added Tax (VAT) Administration and Revenue Performance: Challenges and Opportunities in
the Mekelle Branch of Ethiopian Revenue and Custom Authorities (ERCA), MS Thesis, Mekelle University, Ethiopia,
2010, P. 3.
12
VAT Proclamation 2002, Supra note 10, Art. 3(b), 6(1), 7 (1) (b), (c).
13
Id., Art. 7(2) (a).
14
Currently OECD, WTO and the EU are the main advocators of this principle.
15
VAT Proclamation 2002, Supra note 10, Art. 23(3) and Art. 3(7).
3
attention and regulation by the state. Because, e-commerce concomitant to the vast opportunity
brought to the business and the Government, it come up with its own challenges for the tax
authorities too. This challenge is intensified by, currently in Ethiopia, it is difficult to find
published rulings, tax court decisions, and relevant publications or interpretation notes focusing
on the VAT treatment of electronic commerce.
Indeed, several areas of particular concern could be raised as an issue when the traditional VAT
rules are applied on e-commerce. The first main issue demonstrated insufficiency of the traditional
VAT Proclamation is related with the distinction between goods and services for the purpose of
taxation.16 With appearance of digital products, the query occurred whether to treat them as goods
or services. Even though, in the VAT Proclamation both the term goods and services are defined:
the term "Goods" means all kinds of corporeal movable or immovable property, thermal or
electrical energy, heat, gas, refrigeration, air conditioning, and water, but does not include
money17; similarly "Services" is provided as a “work done for others which does not result in the
transfer of goods.”18 The attribution of digital products either as goods or service is not clear
enough in the Proclamation. For any tax law, however, having a clear definition of terms makes it
easy for tax authorities to engage the taxpayers with less ambiguities and possible loopholes.
A further problem related to the application of the existing VAT rules to e-commerce concerns the
transaction in which foreign supplier render service to Ethiopian consumers without registration
for VAT. Though this problem is not special to Ethiopian only, EU also faces the same problems,19
it has its own adverse consequence when domestic suppliers who are required to registered and
pay VAT found themselves in a disadvantageous position as compared to foreign merchants who
are not required to do so.
The anonymity of the internet also increases the challenge of tax authorities to identify the parties
of the transaction. As it is acknowledged, identifying the parties to a transaction in order to
determine the relevant tax that will be imposed and the relevant tax legislation that will be
applicable to the person is important. Unlike the traditional way of transactions which are entered
16
Hellerstein W., Value Added Taxation of Electronic Supply of Services within the European Community, Jean
Monnet Working Paper 13/01 Cecília Hargitai. ISSN 1087-2221, P. 24.
17
VAT Proclamation 2002, Supra note 10, Art. 2(7).
18
Id., Art. 2(16).
19
Pronina T., Indirect Taxation of Electronic Commerce: The US and European Experience, Lessons for Russia,
LL.M. Short Thesis, Central European University, 2011, P. 44.
4
into with relevant source documentation, e-commerce transactions have a distinct anonymous
character, because the transaction is carried out without papers and pens, offices and warehouses,
and even without employees. So, internet will create challenges for the Ethiopian taxing authority
to verify the details of the transactions, and this could lead to a tax loss for the Government.
The other issue with e-commerce transactions under the Ethiopian VAT Proclamation is related to
permanent establishment in that e-commerce involves non-physical elements and e-commerce
transactions are carried out electronically. Permanent establishment is is a fixed place of business
which generally gives rise to income or value added tax liability in a particular jurisdiction. In
Ethiopia, permanent establishment is defined as “a fixed place of taxable activities through which
those activities of a person are wholly or partly carried on…” 20 This definition excludes places of
taxable activity that are mobile. However, websites does not have specific premises, equipment,
machinery or the like and the software and data constituting the website does not have the degree
of permanency required to be considered to constitute a fixed premises.21 Website information can
be move from one server to another depending on the requirement mostly the internet
infrastructure. In this case it is tough to apply the concept of permanent establishment on e-
commerce transactions. Likewise, in e-commerce the location of the seller as well as the location
of the buyer is often not made known to each other, presenting a degree of anonymity. 22 This allows
tax evasion, and creates difficulties to determine which jurisdiction country has the right to tax.
Furthermore, e-commerce tax administration and enforcement is another dilemma in realizing the
VAT system since business can be conducted across national frontiers and governments’ tax
jurisdiction does not extend beyond their countries' geographical boundaries.
Hence, even though, Ethiopia has taken some steps towards taxation of e-commerce via the VAT
regime, as this thesis will seek to demonstrate, it is not as such adequate to address issues that
requires a further regulation in taxation of e-commerce.
20
VAT Proclamation 2002, Supra note 10, Art. 2(10).
21
Nufransa W., ‘Permanent Establishment for E-commerce in International Taxation’, 2006, P. 336,
<http://elj.warwick.ac.uk/jilt/04-1/basu.html> (Accessed 20 January2017)
22
Basu S., 'To Tax or Not To Tax? That is the Question? Overview of Options in Consumption Taxation of E-
Commerce’, The Journal of Information, Law and Technology, 2004, No. 1, Part 1.
5
1.3. Objective of the Study
As briefly highlighted above, the overall objective of this thesis is to examine how the existing
laws in Ethiopia will apply in enforcing VAT on e-commerce transactions.
This work is central to taxation of e-commerce but it is limited in terms of thematic and
geographical area in the sense that the work is restricted to assess the legal regulations of VAT for
the taxation of e-commerce in Ethiopia. Hence, even though taxation and e-commerce has different
aspects, this research, is not discuss the overall dimensions of e-commerce or all types of taxation
which have been dealt with by various scholars and academics. Rather, so as to make the study
manageable and comprehensively address the issues by the time, financial and material resource,
it focuses mainly on assessment the application of Ethiopian VAT regime in taxation of e-
commerce. Therefore, other types of taxes including income taxes within an e-commerce
environment in or/and outside Ethiopia will not be inspected as part of the study.
Owning to the above background body of knowledge, the study has sought to answer the following
research questions: -The central question to be answered in this study is
6
In addition, this research answers the following sub questions that are necessary to answer the
main questions:
Should the VAT system of Ethiopia tax e-commerce under the regime of goods or services?
Is there a need to create new definition and meaning of permanent establishment in the
VAT Proclamation?
Whether the Ethiopia VAT law is adequate to address the challenges facing the tax aspect
of e-commerce?
What real challenges are experienced in the implementation of Ethiopian VAT on e-
commerce transactions?
What legal and practical issues should Ethiopia consider when amending the current VAT
regime based on other countries’ experience of VAT on e-commerce transactions?
1.7 Methodology
1.7.1 Research Method
In order to ensure that this research achieves its aims and set objectives, the study will consist of
qualitative method, as it needs to examine the topic, which mainly focuses on the assessment of
the application of Ethiopian VAT law on e-commerce transactions. Qualitative research is
advantageous in the case at hand is that it provides a richer and more in-depth understanding of
the subject under study. Similarly, it aims at producing factual description that is based on face to
face knowledge of individual and social groups in their natural setting that is relevant to this study.
7
7.1.2 Data Source
In the study, both primary and secondary data will be employed as a source of information to the
various issues involved in the paper. As regards primary sources, this study will examine various
domestic laws, regulation, and policies on VAT of e-commerce in Ethiopia. With regards to
secondary sources, a review of existing literature on VAT law in taxation of electronic commerce,
including text books, thesis, journal, articles and internet materials are considered and relied upon.
Besides, unstructured interviews with e-commerce website representatives, e-commerce
customers and officers of different ranks who have knowledge in this area of study from the ERCA
were conducted. Accordingly, the study does not utilize schedules of questions. In obtaining the
respondents, this research used Purposive sampling technique. This technique is adopted for the
reason that after field investigation on the group, the study involves a deliberate selection of sample
units who represents the total population.
To this end, the study will analyze legal rules of Ethiopia, which mainly focus on VAT law in
taxation of e-commerce. To examine books, journals, master's thesis, and other documents in
related with taxation of e-commerce in the VAT regime, content analysis technique was employed.
A due regard to practical analysis of relevant theoretical concepts and legislations is also carried
out.
The study’s main limitation was the apparent lack of local text books and published Articles on
the subject under the study. Especially on the case of Ethiopia, it was hardly possible to find a
study in this area and hence there was no choice other than relying on the foreign materials that
are available on. The other problem encountered was getting the timely responses from
respondents; some interviewees did not have time for interview with the researcher and in some
areas it was difficult to get the respondents because some of the people feared to provide
information believing the researcher was the spy who was sent to acquire certain information. All
these mentioned problems in one way or another contributed to the delay of finishing the
dissertation.
8
1.9. Structure of the Study
This thesis is organized into four chapters. Chapter one of this paper is designed to address the
introductory part that provides the underlying principles of the study; which specifically
encompassed background of the study, statement of the problem, objective of the study,
significance of the research, scope, methodology and organization of the paper. Chapter two
elucidates an overview of e-commerce by beginning with a discussion on the nature of e-
commerce, the historical background, typical, scope and the need for taxation of e-commerce are
examined. Equally, the existing international initiatives in regulating e-commerce taxation notably
by OECD and EU also examined. Chapter three, assesses how the legislation and VAT system in
Ethiopia are currently operating. In doing so, the challenges in enforcement of the VAT regime to
e-commerce will be discussed. Finally, the fourth chapter presents the conclusion and possible
recommendations of the paper.
9
CHAPTER TWO
2.1. Introduction
The advent of e-commerce and its’ continued growth has produced many changes in the way
business is being conducted. Like that of the industrial revolution, e-commerce has a potential to
accelerate the rate of growth and development of the world economy. This chapter, hence,
commences by examining the meaning of e-commerce. Historical development of e-commerce,
typical of e-commerce transaction, and its scope will also be a subject of this discussion. The
debate as to the need for e-commerce taxation is the other important focus of this chapter.
There is no single definition as to the meaning of e-commerce universally yet; nor is there any
Ethiopian legislation which sets out a definition. For instance, the OECD has defined an electronic
transaction in April 2000 in their Annexure 4 as “the sale or purchase of goods or services, whether
between businesses, households, individuals, governments, and other public or private
organizations, conducted over computer- mediated networks.”23 The goods and services are
ordered over those networks, but the payment and the ultimate delivery of the good or service may
be conducted on or off-line.24 In this sense the notion of e-commerce transactions can therefore be
understood as the application of information and communication technology to any of the activities
involved in making commercial transaction.
23
Measuring the Information Economy, ANNEX 4. The OECD definition of internet and E-commerce transactions,
2002, P. 89, <www.oecd.org/sti/ieconomy/2771174.pdf> (Accessed 17 March 2017)
24
Ibid.
25
Hill R. & Ian Walden I., The Draft UNCITRAL Model Law for Electronic commerce: Issues and Solutions,
Computer L.18, 1996, P. 13.
10
to perform transactions involving the exchange of goods or services between two or more parties
using electronic tools and techniques.” 26
The Work Programme on e-commerce adopted by the General Council of the WTO states that the
term “electronic commerce” is understood to mean “the production, distribution, marketing, sale
or delivery of goods and services by electronic means.” 27 Similarly, United Nations Commission
on International Trade Law (UNCITRAL) defines e-commerce as “exchange of every kind of data
message in the scope of commercial activities”.28 This activity is based on processing and transfer
of text, sound, and video data by electronic means. Thus, in this context it can be said that e-
commerce includes digital payment of goods and services too. 29 What one can discern from the
above definitions is that what distinguishes e-commerce from traditional commercial activity is
that it is conducted by electronic means.
The introduction of e-commerce is dated back to 1970s and understood as the facilitation of
commercial transactions electronically, using technology such as Electronic Data Interchange
(EDI) and Electronic Funds Transfer (EFT).30 This were allowing business to send commercial
documents like purchase orders or invoices electronically.31 Later on, other forms of electronic
commerce like automatic teller machines (ATM), credit cards, and telephone banking were
introduced.32 However, the first web browser program was written and the World Wide Web was
26
XIWT Cross-Industry Working Team, Electronic Commerce in the NII, P. 1., As cited in, The United States,
Department of the Treasury, Selected Tax Policy Implications of Global Electronic Commerce, Washington, D.C.,
U.S. Government Printing Office, 1996, P. 18,
<https://www.treasury.gov/resource-center/tax-policy/Documents/Report-Global-Electronic-Commerce-1996.pdf.>
(Accessed 18 March 2017)
27
WTO General Council, Work Programme on Electronic Commerce, Adopted by the General Council on 25
September 1998, 30 September 1998 WT/L/274, P. 1, <http://www.wto.org/english/tratop_e/ecom_e/wkprog_e.htm>
(Accessed 03 March 2017)
28
The United Nations Commission on International Trade Law, Model Law on Electronic Commerce,
GA/Res/51/162, 30 January, 1997, Art. 1.
29
Orhan Y., ‘Development of E-commerce Legislation and Taxation of Revenues from Online Content in Turkey’,
<https://www.hg.org/article.asp?id=7717.> (Accessed 28 March 2017).
30
<https://sellitontheweb.com/blog/shipping-fulfillment-resources-ecommerce-business> (Accessed 23 March 2017)
31
Ibid.
32
Palmer C., ‘Using IT for Competitive Advantage at Thomson Holidays’, Institute of Strategic Studies Journal, 1988,
Vol. 21, No. 6, P. 26-29.
11
invented after 1990, in which internet was opened to commercial use. Then, about seven years
later security protocols allowing continual connection to the internet were developed. 33
By the beginning of the twenty-first century, more and more companies worldwide, especially in
U.S. and Western Europe were offering their services over the internet.34 Currently, the term "e-
commerce" is more of associated with the process of purchasing a variety of goods and services
over the internet using secure protocols and electronic payment systems. 35 In view of that, the
emergence of network organizations helps to establish some of the practice supporting the process
of electronic commerce.36
As a business model, e-commerce can be categorized into four main categories namely: Business-
to-Business (B2B), Business-to-Consumer (B2C), Consumer-to-Consumer (C2C), and Business-
to-Government (B2G). These classifications of e-commerce business in to several categories is
essential, as we will see in chapter three, to determine the preferable methods of tax collection in
e-commerce transactions. In the following paragraphs we define these categories.
While relying on modern technologies, especially the internet, B2B e-commerce involves one
organization buying products and services from another. Most importantly, B2B means the
business between companies such as manufacturers, distributors, wholesalers, and retailers. Most
of the e-commerce is B2B type and it greatly occupies more than 80%.37 There is an expert’s
prediction that this type of e-commerce is further improved by the ongoing globalization and grow
even more in the future.38 Though B2B e-commerce is high in transaction and volume, since
33
‘History of E-commerce’<http://www.ecommerce-landcom/history-ecommerce html> (Accessed on 16 March
2017).
34
Dauda A., An examination of The Legal Regulations and Taxation of Telecommunications and Electronic Commerce
in Nigeria, PhD Dissertation, University of Ilorin, Faculty of Law, 2012, P. 110.
35
Oduntan A., Taxation of Electronic Commerce: Prospect and Challenges for Nigeria, LL. B Long Essay, University
of Lagos, Faculty of Law, Nigeria, 2010, P. 14.
36
Ibid.
37
Zorayda A., E-commerce and E-business, 2003, P. 9,
<http://fcitr.kau.edu.sa/GetFile.aspx?id=61164&fn=Ecommerce%20and%20E%20Business.pdf.> (Accessed 17
January 2017)
38
Ibid.
12
businesses tend to be registered entities and can be easily subjected to an audit, it is not as such
problematic for indirect taxation.39
A business following a B2C business model sells goods or services to individuals acting outside
the scope of their profession.40 B2C e-commerce involves “marketing and selling to individual
consumers online.”41 The selling of tangible products among others includes books, consumable
goods, cosmetics, and clothes or it also covers digitized goods such as downloadable software,
music, books, which are intangible. According to Botha et al, B2C can be perceived as ‘the end-
point of a business-to-business value chain.’42 Several websites, such as Rakuten, Amazon, and
eBay are characterized as online B2C.43
C2C e-commerce encompasses a transaction between individuals or consumers whereby they can
easily sell; buy through an online auction like eBay. 44 Businesses involved in C2C e-commerce
play the role of intermediaries, helping individual consumers to sell or rent their assets (such as
residential property, cars, motorcycles, etc.).45 The amount generated through this auction reaches
million dollars a day.46
In addition to business and consumers, governments are active participants of e-commerce. Hence,
‘B2G’ e-commerce means business interactions between business entities and the public sector or
governmental institutions,47 especially where a country has adopted an e-government strategy. In
39
Van der Merwe B., ‘VAT and E-commerce’, SA Mercantile Law Journal, 2003, Vol. 15, No. 3, P. 373.
40
Government of India, Proposal for Equalization Levy on Specified Transactions, Report of the Committee on
Taxation of E-commerce, Department of Revenue, Ministry of Finance, Government of India, 2016, P. 12.
41
Botha J., Bothma C., & Geldenhuys P., (eds), Managing E-commerce, 2004, P. 97.
42
Ibid.
43
Other websites such as: Travelocity.com (http://travelocity.com); Expedia.com (http://www.expedia.om); Dell.com,
(http://www.dell.com); Netbank.com (http://www.netbank.com); EthioGift.com (http://www.EthioGift.com) are a
good examples of B2C.
44
Botha J., (eds), Supra note 41, P. 97.
45
Government of India, Supra note 37, P. 12.
46
Zorayda A., Supra note 37, P. 12.
47
Ibid.
13
B2G model, the procedure of business registration, licensing, advertising, web-based
communications and government-related operations can be executed electronically.48
Based on the extent to which the internet is utilized in the course of a transaction, e-commerce can
be “indirect e-commerce” and “direct e-commerce”.49
In direct electronic commerce, also known as online-business,53 on the other hand, the internet is
used to fulfil contractual obligation, e.g., to deliver ordered software, music or videos. 54 Thus, in
online business, the goods and services in digitized form, are acquired directly from the internet.
Even if, not all services or goods can be delivered electronically, there are several applications in
place on the internet. For instance, downloading of e-books, magazines, newspapers, music,
standard-software, individualized software and using online information services.55 Therefore, one
can say that tangible goods are considered as indirect e-commerce, in contrast, intangible goods,
and data information is the type of direct e-commerce.
48
Ibid.
49
Elani F., The VAT Implications of E-commerce Goods and Services Imported to South Africa, Mini Dissertation,
North-West University, 2014, P. 43.
50
Ibid.
51
European Commission, A European Initiative in Electronic Commerce, 1997, COM (97) 157, P. 3.
<http://aei.pitt.edu/id/eprint/5461> (Accessed 03 March 2017)
52
Andreas K., VAT Taxation of E-Commerce -Under Special Consideration of the 6th EU VAT Directive-, LL.M
Dissertation, University of Cape Town. P. 6.
53
The European Commission defines direct commerce as follows: “direct e-commerce is the online ordering, payment
and delivery of intangible goods and services such as computer software, entertainment content, or information
services on a global scale.”, European Commission, Supra note 51.
54
Id., P. 7.
55
Ibid.
14
2.6. Need for Taxation of E-Commerce
With regard to e-commerce be subjected to tax just like regular commerce, is a debatable issue
among scholars. The first approach, the pro-taxation, contends that e-commerce, just like regular
commerce, should be taxed. Arguments for taxing e-commerce are based on equity, economic
neutrality, and revenue considerations.56 First, “failure to impose the tax on online purchases
would cause significant revenue losses for state and local governments”. 57 Second, allowing tax
exemption for electronic goods and services that are identical to goods and services purchased in
traditional stores is not fair, e.g., not taxing an e-book that is downloaded directly online while
taxing the hardcopy of the same book sold in a store.58 Third, a basic principle of taxation is
economic neutrality. Taxation should be economically neutral that is, it should not influence the
form or location of economic activity.59 Fourth, tax free e-commerce gives these sellers an unfair
advantage over traditional bricks-and-mortar retailers. Means, by comparison, much of e-
commerce does compete with vendors who would be disadvantaged by preferential tax treatment
of e-commerce.60
On the other hand, proponents of anti-taxation argue that “the e-commerce business is an emerging
industry and that taxing online activities would negate its future development; hence, at least a
delay on taxation of e-commerce would be advisable.” 61 Moreover, the opponents of e-commerce
taxation argue that due to the electronic and border-spanning nature of the internet, the existing
tax laws are inappropriate for the internet. Hence, in order for these laws to work for electronic
marketplace, serious modifications and different enforcement mechanisms are required.62
Complexity of taxation is the other argument raised by opponents of e-commerce taxation. With
multiple taxing jurisdictions, it becomes difficult for individual and businesses to know their
respective tax liabilities and the confusion so generated result in avoidance or double taxation.
56
Basu S., ‘Relevance of E-Commerce for Taxation: an Overview’, Global Jurist Topics, 2003, Vol. 3, No. 3, P. 18,
<http://www.bepress.com/gj/topics/vol3/iss3/art2> (Accessed 23 February 2017)
57
Ibid.
58
Oduntan A., Supra note 35, P. 39.
59
Ibid.
60
Ibid.
61
Austan G. et al, ‘Evaluating the Costs and Benefits of Taxing Internet Commerce’, National Tax Journal, 1999,
Vol. 52, P. 413-428.
62
Annette N., ‘E-Commerce: To Tax or Not to Tax? That Is the Question ... or Is It?’, The Computer and Technology
Law Conference, San Francisco, June 29, 2001, P. 32.
15
However, this does not mean that e-commerce vendors should not collect a tax that is dramatically
simplified.63
Therefore, from the cursory reading of the above two arguments it can be said that there is no
consensus as to whether e-commerce should be made subject to taxation or, if so, to what extent.
As a result of this, examine the arguments for and against taxation of e-commerce in a systematic
way in order to provide proper guidance for policy-makers on this important issue has a paramount
importance. In the Ethiopian context, though e-commerce is subjected to tax as a normal business
transaction, due to various legal, infrastructural and other technological reasons the practice is
defective.
As there is now a clear understanding as to the overall notions of e-commerce and taxation of e-
commerce, the following section will address how different jurisdictions are applying VAT on e-
commerce in their systems.
The OECD is one of the leading and very significant organization that shows its efforts to the tax
issues arising from electronic transactions.64 The OECD was originally established to promote and
assist policies with the design to achieve the highest sustainable economic growth and rising
standard of living in ‘member countries’ 65 so that contributing to the development of the world
economy as well.66 The OECD was the first to establish a framework for the taxation of e-
commerce. This was because the OECD realized that electronic commerce has an enormous
potential to change the way people work, play and organize their lives. “If this potential is to be
fully realized, the OECD decided they must provide a taxation framework that provides neutrality,
efficiency, certainty and simplicity, effectiveness and fairness, and flexibility and that precludes
the establishment of new tax obstacles for this new form of doing business.” 67
63
Oduntan A., Supra note 35, P. 39-39.
64
Silafis k., Consumption Taxation & Electronic Commerce: Issues, Approaches and A Way Forward, PhD
Dissertation, University Aberystwyth, Department of Law & Criminology, 2015, P. 155.
65
The members of the sub-group include: Australia, Canada, France, Germany, Ireland, Italy, Japan, Korea, Norway,
the Netherlands, Sweden, Switzerland, United Kingdom, United States, European Commission and Singapore.
66
OECD, Taxation and Electronic Commerce: Implementing the Ottawa Taxation Framework Conditions, 2001,
<http://www.oecd.org/ctp/consumption/Taxation%20and%20eCommerce%202001.pdf> (Accessed 25 March 2017).
67
Ibid.
16
Accordingly, on 8th October 1998, the Ottawa taxation framework conditions was adopted. Since
1998, the work of the OECD’s Committee on Fiscal Affairs (CFA) has continued to develop these
principles into practical guidance for international application. 68 In particular, the OECD has
established working parties in an attempt to craft an international tax policy.
These and several other attempts have paved the way for a statement of broad taxation principles
that should apply to e-commerce:69 The taxation principles, which guide governments in relation
to conventional commerce should also apply equally to e-commerce, namely:
A. Neutrality – taxation is expected to be neutral and equitable between different forms of e-
commerce and between conventional and electronic commerce,70 thus avoiding double taxation or
unintentional non-taxation. Business decisions should be motivated by economic, rather than by
tax, considerations;
B. Efficiency – this principle underlines that the compliance costs for businesses and
administration costs for governments should be as low as possible so that a large fraction of what
is taken from the tax-payer’s pocket is not used up in collecting the tax.
C. Certainty and Simplicity – in order to promote certainty and simplicity, the tax rules should be
clear and simple to understand so that taxpayers can anticipate the tax consequences in advance,
including knowing when, where and how the tax is to be accounted for. 71
D. Effectiveness and Fairness – taxation should produce the right amount of tax at the right time,
and fairness may also indicate horizontal equity, where individuals under equal circumstances are
taxed equally or equal transactions are taxed equally. 72 Accordingly, the potential for evasion and
avoidance should be minimized.
E. Flexibility – the systems for taxation should be flexible and dynamic to make sure that they
keep pace with technological advancement and commercial expansions.
68
OECD, The Economic and Social Impact of Electronic Commerce: Preliminary Findings and Research Agenda,
OECD Digital Economy Papers No. 40, OECD Publishing, Paris, 1999,
<http://dx.doi.org/10.1787/236588526334> (Accessed 16 March 2017)
69
OECD, Electronic Commerce: Taxation Framework Conditions. A Borderless World: Realizing the Potential of
Electronic Commerce, 1998, <http://www.oecd.org/dataoecd/46/3/1923256.pdf.> (Accessed 8 February 2017)
70
Elani F., Supra note 49, P. 50.
71
OECD, Implementation Issues for Taxation of Electronic Commerce, 2003c,
<http://www.oecd.org/tax/consumption/5594899.pdf> (Accessed 8 February 2017)
72
Sol P., Supra note 3, P. 82.
17
These principles can be applied through existing tax rules, and any new or revised administrative
measures in the framework of those rules should be directed towards the application of existing
taxation principles. There should be no discriminatory tax treatment on e-commerce.
Subsequently, the CFA of the OECD proceeded to implement these taxation framework by
establishing five Technical Assistance Groups (TAGs).73 Among those five TAGs, one of the
groups, the Consumption Tax TAG, scrutinized consumption taxes especially VAT and electronic
commerce transactions in three areas, these are the rules for consumption taxation of cross-border
trade, whether the supply of digitized products must be treated as a supply of services, and
mechanisms that can be used to provide immediate protection to the revenue base. 74
Thus, the framework conditions of OECD recommends that, firstly, the rules for consumption
taxation of cross-border trade should result in taxation in the jurisdiction where consumption takes
place.75 As a consequence the OECD suggests that the place of consumption entitles the state to
impose tax. The main purpose of this rule is to prevent double taxation, or unintentional non-
taxation.76 Secondly, for the purpose of consumption taxes, the supply of digitized products should
not be considered as a supply of goods. 77 Accordingly, the OECD proposes that the supply of
digitized products, so pure online-business, should be treated as the supply of services. 78 Lastly, a
reverse-charge, self-assessment mechanism should be used where businesses and other
organizations within a country acquire services and intangible property from outside the country. 79
The OECD countries also agreed that for business to business (B2B) supplies tax should apply in
the jurisdiction in which the recipient is located and for business to consumer (B2C) supplies, the
place of consumption should be the jurisdiction in which the recipient has his or her usual
residence.80 Generally, the OECD has played a significant role in facilitating discussions,
73
The five TAGs created were the Treaty Characterization TAG, the Business Profits TAG, the Consumption Tax
TAG, the Technology TAG and the Professional Data Assessment TAG.
74
Jones R. & Basu S., ‘Taxation of Electronic Commerce: A Developing Problem’, International Review of Law
Computers & Technology, 2002, Vol. 16, No.1, P. 35-52,<http://www.bileta.ac.uk/01papers/rjones.htm> (Accessed
1 January 2017)
75
OECD, International VAT/GST Guidelines, 2006, P. 10, <http://www.oecd.org/ctp/consumptiontax/36177871.pdf>
(Accessed 12 March 2017).
76
Id., P. 4
77
Ibid.
78
Ibid.
79
Id., P. 6.
80
OECD, Consumption Taxation of Cross-Border Services and Intangible Property in the Context of E-commerce, A.
Guidelines on the Definition of the Place of Consumption, 2001, P. 1-2,
18
developing guidelines and possible solutions to the task of indirectly taxing e-commerce by tax
authorities.81 Nonetheless, it is good to note that, though OECD members apply consumption taxes,
there are no model treaties or bilateral international agreements that cover VAT especially for e-
commerce transactions.82 Hence, the OECD is anticipated to lead efforts towards a model tax treaty
on taxation of VAT arising from e-commerce.83
European Union is one of the most prominent tax jurisdictions in the world to develop and
implement a simplified framework for consumption taxes on e-commerce. This framework of EU
is in compliance with the principles agreed within the framework of the OECD.84 Accordingly, in
June 1999, the European Commission issued a Working Paper to revise the current tax rules of the
VAT Directives for both goods and services, irrespective of the medium through which these items
are vended.85 By acknowledging the complexity of the VAT procedures and the delays in obtaining
refunds of VAT paid in other member states are major disincentive to cross-border trade, the paper
also recognized the need to apply existing taxation rules effectively. 86 Besides, it underlines the
improvement of the existing rules based on the evolution of business, and particularly e-commerce.
In 2000, the European Commission issued a proposal for a directive to modify the rules for
applying VAT to certain services supplied by electronic means as well as subscription-based and
pay-per-view radio and television broadcasting. The objective of the proposal is to create a level
playing field for the taxation of digital e-commerce in accordance with the OECD principles. The
proposal mainly concerns the supply over electronic networks of software and computer services
generally. The proposal would ensure that when these services are supplied for consumption within
Later, Council Directive 2002/38/EC which entered in to effect on 1st July 2003, was adopted on
7th May 2002. Following the effective date, the European Union’s directive on electronic
communications obliges all non-EU companies selling digital goods and services online to
consumers within the EU to register with an EU tax authority and charge, collect and remit VAT.88
The registration of non-resident businesses, hence, can be made in an interim “special scheme”
arrangement with one EU member state, which will operate a form of clearinghouse to ensure each
EU member state receives its appropriate amount of VAT due to it. 89 After remittance, the
appropriate EU countries in which the digital goods and services were sold, will redistribute the
VAT.90 Based on this Directive, therefore, the place of taxation was changed from the origin
principle to the destination principle for B2B transactions; and, for B2C transactions, the origin
principle was still applicable. There was also a list of items supplied that were considered to be
electronic services supplied.
In 2006, Council Directive 2006/58/EC was adopted on 27th 2006 June 2006, Council Directive
2006 /138/EC was adopted on 19th December 2006 and Council Directive 2008/8/EC was adopted
on 12th February 2008. These VAT arrangements were extended until 31 December 2009. As far
as electronically supplied services are concerned, Council Regulation (EC) 792/2002 temporarily
amending Regulation (EEC) 218/92 on administrative co-operation in the field of indirect taxation
(VAT) subsequently included in Regulation (EC) 1798/2003, “introduces additional measures
necessary for registering for VAT purposes of e-service traders not established within the
Community and where the services were actually used, for distributing the VAT receipts to the
Member States”.91 As per these new rules, when selling on markets outside the EU, suppliers of
87
McLure C., ‘The Value Added Tax on Electronic Commerce in the European Union’, International Tax and Public
Finance, 2003, Vol. 10, No. 6, P. 753.
88
European Commission, Council Directive 2002/38/EC: Amending and amending temporarily directive 77/388/EEC
as regards the Value Added Tax arrangements applicable to radio and television broadcasting services and certain
electronically supplied services, 2002,<http://eur-lex.europa.eu/legal-content/GA/TXT/?uri=CELEX:32002L0038>
(Accessed 2 February 2017)
89
Commission Proposal for a Council Directive Amending Directive 77/388/EE, as cited by, Oduntan A., Supra note
35, P. 53.
90
Oduntan A., Ibid.
91
Dauda A., Supra note 34, P. clxxv.
20
EU are no longer obliged to levy VAT. Previously under tax rules drawn up before, EU suppliers
had to charge VAT when supplying digital products even in countries outside the EU. 92
The reform, by obliging non-EU suppliers to charge VAT as EU suppliers when they are providing
electronic services to EU non-taxable persons, it tries to bring to an end the existing competitive
distortion.93 This is something which EU businesses had been actively pursuing for some time. 94
However, the VAT rules for non-EU suppliers selling to customers in the Union remain applicable.
In doing so, the VAT is supposed to be paid by the importing company under reverse charge
mechanisms.
Council Directive 2008/8/EC was adopted on 12 February 2008. 95 The aim of the Directive was to
combat tax evasion connected to intra-community transactions.96 In this Directive, the reverse
charge mechanism was introduced on B2B transactions in the European Union. According to
reverse charge arrangement, the liability to pay VAT is shifted from the supplier to the recipient
of the supply.97 However, the reverse charge mechanism that was supposed to be applied on B2B
transaction was not taken as an effective option for B2C transactions. Because, in B2C
transactions, consumers are not registered and have neither the skills to voluntarily proceed to the
remittance of the tax nor any incentive to do so given that they have to bear the economic burden
of the tax without any possibility of recovering it. 98 Thus, “the registration of European suppliers
in one of the member states and pay VAT at that state for all supplies to European consumers
based on the tax rates of the countries of consumption is required”. 99 Regulation 2011/282 is the
other EU Directive that was issued on 15 March 2011 to supply a definition of electronically
supplied services for VAT purposes.100 Consequently, “electronically supplied services shall
include services which are delivered over the internet or an electronic network and the nature of
92
VAT on Electronic Services, as cited by, Dauda A., Supra note 34, P. cclxxv.
93
Dauda A., Supra note 34, P. cclxxv.
94
Ibid.
95
Council Directive 2008/8/EC of 12 February 2008 Amending Directive 2006/112/EC as Regards the Place of
Supply of Services, Official Journal of the European Union, <http://data.europa.eu/eli/dir/2008/8/oj> (Accessed 23
March 2017)
96
Dauda A., Supra note 34, P. cclxxiv.
97
Ibid.
98
Ibid.
99
Pronina T., Supra note 19, P. 35.
100
European Commission, Council Implementing Regulation (EU) No 282/2011, Official Journal of the European
Union, <http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:077:0001:0022:EN:PDF> (Accessed
17 March 2017)
21
which renders their supply essentially automated and involving minimal human intervention, and
impossible to ensure in the absence of information technology.” 101
To conclude, it can be said that the European Union has done considerable work in adjusting the
existing VAT rules to the realities of e-commerce.102 But, it does not mean that the European Union
does have a perfect legal framework which tries to tackle all the problems related with taxation of
e-commerce. So, the EU is still in the transitional period of establishing concrete rules to deal with
the phenomenon of e-commerce taxation.103 Developments and amendments implemented by the
EU in their application of VAT on e- commerce may form lessons for Ethiopia in coming up with
appropriate policy and legislation.
101
Ibid, Art. 7.
102
Rajiv R., India: Country Report on E-Commerce Initiatives, Department of Information and Technology Ministry
of Information and Technology India, 2005, P. 133-145.
<http://www.unescap.org/tid/publication/part_three2261_ind.pdf> (Accessed 14 February 2017)
103
Watako M., Supra note 82, P. 60.
22
CHAPTER THREE
3.1. Introduction
Ethiopia is one of the least developed countries, which has recently experienced a tremendous
growth in the number of internet users.104 As report shows, individual purchasers and business buy
more and more goods and services online both from local and foreign suppliers. 105 According to
the 2015 UN report, in the years of 2009 B2C e-commerce sales in Ethiopia is 0.02 $billions, in
the years of 2010 is 0.03 $billions and increase year by year in 2011 the business of e-commerce
is 0.04 $billions and end the year of 2012 business of e-commerce growth is 0.06 $billions.106
Taking the expansion of online transactions in to consideration, the VAT system of Ethiopia has
taken some steps in adapting the existing VAT rules to the realities of e-commerce. However, due
to the absence of proper regulation and enforcement problems, most online transactions simply
escape taxation. In this chapter, the VAT systems that Ethiopia currently has mainly the issues
related to the application of the VAT legislations on e-commerce transaction will be examined.
Over the past couple of years, e-commerce in Ethiopia has shifted the gear on how business is
done; as a result, people have started doing online business just like traditional transactions.107
Most companies, associations, chambers and government offices have set up websites. These sites
mainly provide information about an organization, and its products and services. There are very
few sites where financial transactions can be completed. As reports show, the main reasons for
low e-commerce transactions are due to the absence of legal framework for completing an
electronic business or financial payment system, stringent exchange control regulations , low
104
Digital In 2017: Global Overview, <https://wearesocial.com/special-reports/digital-in-2017-global-overview.>
(Accessed 29 June 2017)
105
UNCTAD, E-commerce in the Least Developed Countries E-commerce and Development Report, New York and
Geneva, 2001, Part Four, P. 192, <http://unctad.org/en/Docs/ecdr01p4.en.pdf> (Accessed 30 March 2017)
106
UNCTAD, Information Economy Report 2015: Unlock the Potential of E-Commerce for Developing Countries,
New York and Geneva, Sales No. E.15. II,D.1, 2015, P. 25,
<http://unctad.org/en/PublicationsLibrary/ier2015_en.pdf > (Accessed 11 October 2017)
107
Eden S., AfricaBusiness.com. <http://africabusiness.com/2016/05/18/e-commerce-paving-its-way-in-the-
untapped-ethiopian-market/> (Accessed 22 March 2017); Addis Fortune (Addis Ababa), Ethiopia: Can We Afford
the Internet Shutdown in Ethiopia?,< http://allafrica.com/stories/201706060615.html> (Accessed 19 October 2017)
23
internet usage due to lack of adequate telecom facilities, and overall lack of confidence in the
security and reliability of e-commerce transactions.108
E-commerce models are either an extension or revision of traditional business models, such as
advertising and auction models, or a new type of business model that is suitable for the Web
implementation, such as informediary, selling information collected over the Web about
individuals and businesses to other businesses. 109 Despite the fact that there are various e-
commerce models, the most common e-commerce models in Ethiopia are The Merchant model
and The Advertising model. The Merchant model is a simple extension of the usual offline retail
model to the online world by using the internet. Hence, except that it sells goods and services over
the Web, the most common type of merchant model is similar to a traditional business model.110
Amazon.com is one of the online retail store that can be cited as a good example of this category
in the international arena.111 Local merchant model websites are emerging in Ethiopia. One
example-shopping platform in Ethiopia is Jumia.com, which allows members to purchase various
items sold on the website.112 The website offers various products like dresses, shoes, mobiles,
laptops etc.
The other most popular e-commerce model in Ethiopia is advertising model. This business model
uses the internet as a medium to target and deliver marketing messages to customers and takes a
number of forms.113 “The most prominent of online advertising is display adverts, in which an
advertiser pays to display adverts linked to particular content or user behavior, and search engine
adverts, in which an advertiser pays to appear among internet search results.” 114 Search engines
and directories such as Google, Yahoo! and AltaVista and social media such as Facebook provide
content and allow the users to access this content for free while selling advertising. 115 Google for
example sells advertising space by letting advertisers to bid on the price of keywords and then
charging based on the number of users who clicked the adverts. Delala.com is one of the few online
advertising in Ethiopia, which promotes and markets car as well as other goods and services
108
Bultum A., ‘Factors Affecting Adoption of Electronic Banking System in Ethiopian Banking Industry’, Journal
of Management Information System and E-commerce, 2014, Vol. 1, No. 1, P. 3.
109
Hossein B., Electronic Commerce: Principles and Practice, Academic Press, USA, 2002, P. 44.
110
Ibid.
111
<https://www.amazon.com/gp/help/customer/display.html?nodeId=596186> ( Accessed 30 June 2017)
112
<https://www.jumia.com.et> (Accessed 30 June 2017)
113
OECD, Addressing the Tax Challenges of the Digital Economy, OECD/G20 Base Erosion and Profit Shifting
Project, OECD Publishing, P. 28, <http://dx.doi.org/10.1787/9789264218789-en> (Accessed 28 June 2017)
114
Ibid.
115
Hossein B., Supra note 109.
24
including real estate in Ethiopia.116 This website is established to overcome distance barrier
between both the potential buyers and the sellers and save the valuable resource devote to buy
and/or sell various products and services with a click of mouse and sellers to advertise the item
they want to sale.117 Another online marketing business popular in Ethiopia is Kaymu.com. This
website is an online marketplace in Ethiopia where by buyers and sellers can meet and make
awesome business deals.118 Kaymu offers a wide variety of used and new items including Clothes,
accessories, electrical goods, gadgets, gifts, and jewelries to the buyers.119 Similarly, Qefira is an
online and mobile web based advertisement platform that offers buyers and sellers an opportunity
to effectively reach their target audience.120
VAT in Ethiopia was administered by the “EFIRA, Ethiopian Customs Authority”121 and the
Regional Government’s Finance Bureaux.122 The ECA administers VAT on imports of goods and
services into the country.123 In the fiscal year 2009, VAT on import items generated revenue of 4.2
billion birr that accounted 34.54 percent of the total revenue collected by the ERCA from taxes
imposed on imported items.124 The EFIRA with its VAT department, large taxpayers’ office and
branch offices (Addis Ababa branch and regional branch offices) administers federal and joint
116
<https://www.delala.com > (Accessed 16 June 2017)
117
Ibid; in the same fashion, Mekina.net offers a similar service in Ethiopia. Hence, if people want to market their
cars using Mekina.net, they have to pay ETB 250 per car.
118
<https://www.kaymu.com > (Accessed 16 June 2017)
119
Ibid.
120
Ibid.
121
The EFIRA and ECA have merged since the year 2008; Yeneakal T., ‘Melaku to Remain Head at the New
Revenue Authority’, Capital Newspaper, Addis Ababa, 20 July 2008,
<http://www.capitalethiopia.com/archive/2008/july/week3/local_news.htm#6> (Accessed 22 October 2017)
122
Ethiopia is a federal country with nine regional governments and two self-administering cities (Addis Ababa and
Dire Dawa cities).
123
VAT Proclamation, Supra note 10, Art. 26(4).
124
Abebe H., Imports and taxes in Ethiopia, Taxpayers Education and Communication Senior Expert, P.7,
<http://www.erca.gov.et/images/Documents/Customs/Others/1457.pdf>(Accessed 19 September 2017)
25
VAT on local transactions, while regional governments’ finance bureaus administer their own
VAT revenues.125
As seen throughout in the discussion above, the main Ethiopian VAT regime is enshrined in the
2002 VAT Proclamation. The proclamation stipulates that VAT shall be charged in accordance
with the provisions of the proclamation on the supply of goods and services in Ethiopia and on the
importation of goods and services into Ethiopia. Correspondingly, the Proclamation applies to the
supply of goods and rendering of services conducted by a non-resident in Ethiopia through a
permanent establishment in Ethiopia or through the internet. 126 Therefore, as per Article 4(7) of
the VAT proclamation, if a non-resident engage in the supply of goods and rendering of service
via internet then the VAT Proclamation will be applied. This is true even if a non-resident do not
have a permanent establishment in Ethiopia.
Taxable transaction is defined in the VAT Proclamation expansively as “[a] supply of goods or a
rendition of services in Ethiopia in the course or furtherance of a taxable activity other than an
exempt supply under Article 8.” 127 Here, The VAT Proclamation of Ethiopia specifies that VAT
shall be charged on any supply of goods or services in Ethiopia where it is a taxable supply made
by a taxable person in the course of or in furtherance of any business carried on by him. There are,
however, lists of exempted goods and services from VAT by the Proclamation. 128 In this sense, it
can be stated that the notion of taxable transaction is related with supply of goods or rendition of
services.
When referring to the VAT Proclamation for the definition of goods and services, the term good
is defined broadly. It includes all corporeal movable or immovable property. 129 The definition is
confined to corporeal property. Hence, incorporeal property (such as intellectual or industrial
property (copyrights, patents, trademarks and the like), shares, stocks and securities) and other
intangible properties are not considered as goods.130 However, incorporeal property may be treated
125
Wolela A., ‘Value Added Tax Administration in Ethiopia: A Reflection of Problems’, e Journal of Tax Research,
2008, Vol. 6, No. 2, PP. 145-168.
126
VAT Proclamation 2002, Supra note 10, Art. 4(7).
127
Id., Art. 7(3).
128
Ibid; In addition, Article 8 (4) of the Proclamation empower Ministry of Finance to add its own exemption lists of
goods and services not listed in the Proclamation.
129
Id., Art. 2(7).
130
Art. 2(7) define “goods” as, “all kind of corporeal movable or immovable property, thermal or electric energy,
heat, gas, refrigeration, air conditioning and water energy, but does not include money.”
26
as services for the purposes of VAT. The definition expressly includes thermal or electrical energy,
heat, gas, refrigeration, air conditioning and water. Thus, the transfer or provision of these utilities
is treated as a supply of goods (not services) for the purposes of the VAT.
The other term that is central to the operation of the VAT is service. As provided under Article
2(16), services is defined as “work done for others which doesn’t result in the transfer of goods.”
This catchall definition has a vital role to prevent sales from escaping tax by not falling within
either the definition of goods or services. What we have to understand here is that the terms
“goods” and “services” shall be treated separately and something cannot be goods and services at
time.131
With respect to the classification of digitized items, the VAT Proclamation does not contain a
specific clear provision that determines how digitized items will be characterized as goods or
services. Nonetheless, the definition of services is broadly formulated and includes everything that
does not constitute goods. Accordingly, the supply of digital content or electronic services would
have been classified as a service. It follows that intangible property does not constitute goods,
therefore falls within the definition of services.132 This corresponds to an EU proposal that for VAT
purposes trade in digital goods be treated as a supply of services. 133 Here, the VAT Proclamation
of Ethiopia says nothing as to what electronically supplied services include. In South Africa, for
example, the VAT Regulation lists the services that meet the definition of electronic services per
the VAT Act. Consequently, educational services, games and games of chance, internet based
auction services, miscellaneous services and subscription services are electronic services where
such services are supplied by means of any electronic agent, electronic communication or the
internet for any consideration.134 The list provided in the Regulation are not exhaustive and include
all electronic services that the VAT rules would apply to however it provides a level of guidance
as to what the definition encompasses.135 Yet, in Ethiopia, there is no legislative definition of
electronically supplied services for VAT purposes. Thus to clear up some misunderstanding
131
Yohannes M. & Sisay B., Supra note 5, P. 73.
132
Johnston, ‘Value Added Tax on Virtual World Transaction: A South Africa Perspective’, International Business
and Economics Research Journal, 2013, Vol. 12, No. 1, P. 76.
133
Jones R. & Basu S., Supra note 74.
134
South African Value-Added Tax Act, 1999, Regulations Prescribing Services for the purpose of the definition of
“Electronic Services”, Government Gazette, Act No. 89/1999, No. 37489, Section 1. The Regulation is similar to
that of the European Union (EU) per Annexure 1 to the council Regulation of 17 October 2005.
135
Tsogo R., An Evaluation of The Practical Application of The South African VAT Legislation on Electronic Services:
A Case Study, LL.M Dissertation, North-West University, 2015. P. 24.
27
concerning what is included in the definition of electronic services it became necessary that the law
be clarified.
Besides all that is discussed above, for practical purposes a distinction must be drawn between
supplies that are ordered and delivered on the Internet by electronic means, and commodities that
are ordered on the Internet and delivered by traditional means.136 In the latter case, administrative
procedures already in place for traditional cross-border trade continue to apply.137 The supply of
tangible goods ordered over the Internet is fairly easy to monitor because tangible corporeal goods
must be cleared through customs at a border post before entering the country. 138 Goods delivered
by airmail are monitored by the Ethiopian post office, where the value for VAT purposes is
determined, and where VAT is levied at the appropriate rate. 139 These goods, accompanied by a
VAT declaration, are posted to the recipient. The recipient must pay VAT (as indicated on the
VAT declaration form) at the post office where the package is collected. The fact that tangible
goods, which are ordered electronically, are delivered to a designated physical address simplifies
the task of ensuring that appropriate VAT is levied and collected. 140
In the case of Internet deliveries of incorporeal items such as software, music, and videos, it is
often difficult to determine whether or not a transaction has occurred.141 Since electronic deliveries
do not go through the mails or customs, it is difficult to track and trace the occurrence of these
transactions.142 Meaning, in electronically delivered digitized products, delivery cannot be
intercepted as in the case of corporeal goods that must enter a customs area; this would essentially
avoid import VAT.
As we will discuss here in below, a person is a taxable person if he makes taxable sales above a
threshold amount and such sales are made in connection with certain economic or taxable activity.
In the following section we are going to see the kind of e-commerce activity that gives rise to sales
subject to tax.
136
Ebrill L, et al, The Modern VAT, International Monetary Fund, Washington, D.C. 2001, P. 186.
137
Ibid; OECD, International VAT/GST Guidelines on Neutrality, 2011, P. 5,
<http://www.oecd.org/tax/consumptiontax/48331948.pdf> (Accessed 11 October 2017).
138
Steyn T., ‘VAT and E-commerce: Still Looking for Answers?’, SA Mercantile Law Journal, 2010, Vol. 22, No.
2, P. 233; Van der Merwe B., Supra note 39, P. 382, Naicker K., ‘The VAT Implications of E-commerce’, Taxtalk,
2010, P. 8.
139
Steyn T.,Supra note 138.
140
Id., P. 234; Naicker K., Supra note 138.
141
Ebrill L, et al, Supra note 135; OECD, Supra note 74, P. 188.
142
Ibid, P. 5.
28
3.5. Taxable Activity
The VAT Proclamation under Art 6 clearly envisages what kind of activity or transaction is subject
to imposition of VAT. Accordingly, Taxable activity is;
“[A]n activity which is carried on continuously or regularly by any person. (1) In
Ethiopia, or (2) partly in Ethiopia whether or not for pecuniary benefit that involves
or is intended to involve in whole or in part, the supply of goods or services to another
person for consideration.”143
On the basis of the above definition, irrespective of the profit accrued, as far as there is regular or
continuous supply for consideration, it is a taxable activity. In other words, an activity may be a
taxable activity within paragraph (2), whether or not it is carried on for pecuniary profit. The terms
regularly and continuously here indicate the frequency of the transaction. Hence, an activity carried
on continuously or regularly by any person wholly or partly in Ethiopia that involves or is intended
to involve the supply of taxable goods or services to a person for consideration is a taxable activity.
However, as per the Value Added Tax (Amendment) Proclamation, the phrase “any person” under
Article 6 is replaced by “any registered person”.144 Similarly, the requirement of “activity which
is carried on continuously or regularly” is also changed by “activity whether or not carried on
continuously or regularly”. 145 Hence, to be taxable, the activity does not have to be carried on
continuously or regularly. Meaning, as far as the activity is carried out by a registered person, an
activity is a taxable activity even if it is not carried on continuously or regularly (assuming the
other necessary conditions are met).
When looking at taxable activities regarding e-commerce transactions, businesses can advertise
and sell products through their own websites and cyber malls and delivering the products via
internet and courier services and information databases that can be subscribed to at a fee. 146 For
example, Delala.com, Mercato.com and Qefira, are an online and mobile web based advertisement
platforms that sells advertising space to the advertisers by letting them to promote and market their
products and reach their target audiences. Similarly, Jumia sales various used and new products
including clothes, shoes, accessories, mobiles, jewelries and other similar products to the buyers.147
Another potential taxable activity in e-commerce transaction is the sale of intangible property such
143
VAT Proclamation 2002, Supra note 10, Art. 6.
144
Value Added Tax (Amendment) Proclamation, 2008, Federal Negarit Gazeta, Proc. No. 609/2008, 15th year, No.
6, Art. 2(3).
145
Ibid.
146
Sijbren C., ‘VAT Treatment of Immovable Property’, Tax Law Design and Drafting, 1996, No. 1, P. 421.
147
Ibid.
29
as software and related purchases. Other services include brokerage services.148 Consequently,
where those and similar e-commerce activities are carried on by any registered person either in
Ethiopia or partly in Ethiopia for consideration then the activity is subject to VAT. This is true
whether or not the activity is being carried on continuously or regularly.
The other most important point we need to bear in mind here is that in the Ethiopian VAT
proclamation, the place of supply is included in the definition of taxable activity, as the taxable
activity must be conducted “in Ethiopia” or partly in Ethiopia”.149 This is, however, not clear when
e-commerce transactions will be considered to be conducted in Ethiopia and yet no guidelines are
issued in this regard.
Ethiopia has two VAT rates upon which tax is calculated, which include the standard rate of 15%
and zero-rate, both computed on taxable supplies.150 This standard rate of 15% is payable upon
importation of goods and services irrespective of whether the importer is a VAT registered
taxpayer or not.151 Conversely, the supply of goods that are exported is zero-rated. Likewise,
services rendered outside Ethiopia and services rendered to a non-resident who is outside Ethiopia
when the services are rendered are zero-rated. However, regarding e-commerce it is not clear what
will constitute proof where these services are delivered over internet and apply the applicable VAT
rate provided in the Proclamation.
The other important point worth to discuss at this stage relates to the notion of tax collection
mechanisms. This is important because, inadequate and inappropriate VAT collection mechanisms
in cross-border e-commerce transactions are the main sources of VAT fraud and the erosion of the
tax base.152 As far as online consumption taxes is concerned, there are various approaches already
existing and new ones discussed. These mechanisms are self-assessment/reverse charge;
148
Delala.com is a good example of brokerage service provider in Ethiopia.
149
See VAT Proclamation 2002, Supra note 10, Art. 10(1) in tandem with Art. 6.
150
Ibid, Art. 7(1) (2).
151
However, unlike individual consumer, VAT registered importers are entitled to claim credit for VAT paid on
imports in their monthly VAT returns.
152
Alfredo J., Applying VAT to International Trade-The Challenge of Economic Globalization: The Challenge for Tax
Administrations, First Meeting of the OECD Global Forum on VAT, 2012, P. 54,
<http://www.oecd.org/ctp/consumptiontax/PptpresentationsessionmaterialGFonVAT.pdf> (Accessed 6 April 2017)
30
registration of non-residents; tax at source and transfer; collection by trusted third parties, and
Technology based solutions.153
Rather than registering in each jurisdiction where supplies are made, other option is there in which
the suppliers are taxed at source and transfer the revenue to the jurisdiction of consumption.160 This
alternative is considered to be unfeasible in the near future. 161 Because, in addition to the increase
cost of administration, it needs an international agreements regarding enforcement, collection and
revenue transfers.162
The collection of consumption taxes by third parties is also another approach. In this method, the
responsibility of collecting the taxes is not on the revenue authorities, rather financial institutions
153
Andreas K., Supra note 52.
154
Ibid.
155
For more discussion see section 3.7.
156
Emerging Concepts for Defining Place of Consumption, P. 4,
<http://www.oecd.org/tax/consumptiontax/39874228.pdf> (Accessed 7 April 2017)
157
OECD, Supra note 74.
158
Andreas K., Supra note 52.
159
OECD, Consumption Tax Aspects of Electronic Commerce, A report from Working Party No. 9, 2001, P. 15,
<http://www.oecd.org/tax/consumption/2673667.pdf.> (Accessed 7 April 2017)
159
Ibid.
160
Ibid.
161
Id., P. 16,
162
Ibid.
31
might have to bear that task.163 This system could be effective. Nonetheless, the feasibility of
shifting the onus of collection onto trusted third parties is questionable. 164
Lastly, inventing a new technology that simplify the tax collection system might be an alternative
feasible approach. This method of tax collection involve the use of software, which would
automatically calculate the tax due on a transaction and remit (through a financial intermediary)
the tax to the jurisdiction of consumption. 165 However, this might not be realized in a short term,
rather a medium to long term option.166
At the outset, it is worth noting that registration is one of the basic element of VAT. The VAT
Proclamation of Ethiopia provides for both mandatory and voluntary registration of tax payers.
Thus, persons are required to register as a taxpayer if they anticipate to or make taxable supplies
with a total value that exceeds the stipulated threshold value (500,000 Ethiopian birr) for a twelve
month period, in the month that this occurs.167 Meaning, as per the VAT Proclamation, if the total
value exceeds 500,000 birr, registration is compulsory. When the threshold has been reached, the
person liable to be registered as a taxpayer is required to take the necessary steps to apply for
registration within the day specified under Article 16(3) of the VAT Proclamation.
Registration may occur voluntarily, provided that the applicant person shall supply goods or render
services at least 75% of his/her goods and services to a person registered for VAT in a regular
manner.168 A direct consequence of voluntary registration is that the registered person will have to
account for output tax and will be able to claim credit or refund, 169 as an agent of ERCA.
In practice, though online transactions have become one of the growing commerce models in
Ethiopia, there is a little exercise for which stores on e-commerce websites are registered or report
their incomes to the tax authority. Having this in mind, the study was conducted by asking the e-
commerce website representatives whether they are registered for VAT or not. Out of the 5 e-
commerce websites, 3(60%) of them are registered for VAT and 2(40%) of them are not registered
163
Ibid.
164
Ibid.
165
Ibid. For instance, in US several tax compliance software such as ‘Taxware’, ‘Certitax’ and ‘Corptax’ are available
to internet vendors in order to determine their taxability of sales.
166
Andreas K., Supra note 52, P. 23.
167
VAT Proclamation 2002, Supra note 10, Art. 16(1).
168
Id., Art. 17.
169
Yohannes M. & Sisay B., Supra note 5, P. 75; see also VAT Proclamation 2002, Supra note 10, Art. 27.
32
for VAT.170 The main reasons why those e-commerce websites are reluctant for registration are
lack of knowledge (awareness) about the time, ways and reasons of registering for VAT, the
absence of strong control by the authority, the need of the society to buy goods and services without
VAT. Likewise, the tax authority does not device an effective online system for the registration of
e-commerce websites for VAT purpose. These pitfalls in the existing tax system will result in
reduced the potential tax revenues.
As described above, under the reverse charge mechanism, “the person liable for the payment of
the VAT on the particular transaction is the recipient/ buyer.” 171 In other words, in this mechanism
the liability to pay VAT is shifted from the seller to the buyer. “The supplier/service provider
would be solely responsible for indicating the transaction to the Revenue service.” 172 The
following discussion is devoted to discuss the reverse tax rules of Ethiopia and its application in
B2B and B2C transactions.
When we see the case of reverse charge mechanism in the Ethiopian context, the VAT
Proclamation provides that if a non-resident person who is not registered for VAT in Ethiopia
renders services in Ethiopia for a person registered in Ethiopia for VAT or any legal person, the
rendering service is subject to taxation.173 Therefore, in the case of B2B e-commerce transactions
for purposes other than exempted supplies, the recipients of electronic services, the imported
service, are required to make use of the reverse-charge mechanism.174 As provided under Article
23(3) of the VAT Proclamation, the amount of tax imposed is determined by a method of
calculation to be determined by Regulations issued by the Council of Ministers.
Consequently, if a consumer who is registered for VAT receives the imported service, he/she is
required to pay VAT at the time for filing of the VAT return for the accounting period in which
170
From those 3 VAT registered e-commerce websites, none of them are a Foreign-based website. On the other hand,
among those two unregistered websites, one of them is a foreign-based website that makes supplies of goods and
services in Ethiopia.
171
International VAT Association, Combating Fraud in the EU: The Way Forward, Report Presented to the European
Commission, 2007. P. 22.
172
Ibid.
173
VAT Proclamation 2002, Supra note 10, Art. 23(1) and (2).
174
Id., Art. 23(3) and Art. 3(7).
33
the transaction took place.175 Nonetheless, where the customer is not registered for VAT, the period
of payment is different and the withheld tax is payable within 30 days of payment to the non-
resident.176 It must be noted that a person who receives imported services still has to acknowledge
receipt of the non-taxed imported service to ERCA and later declare it as input tax. Accordingly,
if a businessperson does not issue receipts then it cannot claim a refund of the corresponding
amount on taxes it paid on inputs it purchased.
In these circumstances, the reverse charge mechanism adopted by the Government of Ethiopia
has a number of key advantages. To mention them; firstly, the Ethiopian Tax Authority have the
opportunity to verify and enforce compliance since that authority has jurisdiction over the
customer. Secondly, the compliance burden is shifted from the supplier to the customer and is
minimized since the customer has full access to the details of the supply. Thirdly, the compliance
costs for the Tax Authority are also low because the supplier is not required to meet tax obligations
in Ethiopia (e.g. VAT identification, audits, which would otherwise have to be administered).
Finally, it reduces the revenue risks associated with the collection of tax by non-resident suppliers,
whether or not that supplier’s customers are entitled to deduct the tax or recover it through input
tax credits.
However, it is worth to note that in Ethiopia there is no effective online payment system currently
working in the international level.177 The most common means of payment used for import trades
are Letter of Credit, Cash against Document and other similar trade instruments.178 A study
conducted by Belaynew point out that vast majority of the importers in Ethiopia are dependent on
Letter of Credit and 77% of the importers use Cash Against Document as a means of payment.179 But,
this payment system is traditional, compared to the new e-commerce payment system like credit card
and debit card. In Ethiopia, the reality shows that the infrastructure for the latter two payment
modalities for foreign trade payment is almost not exist,180
175
Id., Art. 23(4).
176
Id., Art. 23(5).
177
Belaynew A., Electronic Commerce: Opportunities and Challenges of general importers in Addis Ababa, MBA
Thesis, Addis Ababa University, 2012. P. 69.
178
Ibid.
179
Ibid.
180
Ibid. If credit card and debit card ownership cannot be increased; some other electronic forms of payment need to
be developed. Because, without electronic payments, much of e-commerce transactions will be difficult to effective.
Without electronic payment facilities, websites will remain to be information tools rather becoming venues where
business transactions are consummated.
34
Above and beyond, it is illegal for individuals to casually trade on foreign exchange. Those foreign
exchange restrictions on payments and transfers are not consistent with international standards, as
determined by the IMF.181 For example, the Ethiopian currency (birr) is not freely convertible
because the exchange rates are set by the government. 182 Similarly, Ethiopia limits foreign
currency inflows, outflows, and the amounts that local and foreign individuals and companies can
hold.183 These restrictions have a negative impact on the growth of those e-commerce ventures
currently operating and turning away possible foreign investment in new initiatives. 184 Equally, it
increase money laundering and underground market for Ethiopia when individuals and businesses
seeking to operate internationally need to find alternative means of managing their foreign
exchange needs. These alternative means are difficult for the authority to monitor and track.185 At
a more individual level, due to these foreign exchange restriction problems, taxpayers will not
report the details of transactions that are carried out electronically to the authority; this ultimately
limits the ability of the government to collect VAT from those transactions.
The method of collection under the cross-national e-commerce transaction is in large part
dependent upon whether a transaction involves the delivery of a good or of a service. When, for
example, a final consumer orders a taxable tangible goods (a DVD, CD, clothing, etc.) over the
Internet, but the good is physically shipped to the consumer in Ethiopia, this is considered "indirect
e-commerce," and the rules governing the collection of VAT is similar to that of goods ordered by
traditional means.
Here, the VAT proclamation of Ethiopian under Article 23(1) (2), without any distinctions of the
types of the transaction, extends the application of reverse charge mechanism on B2C e-commerce
transactions. However, reverse-mechanism suits well for B2B transactions, when business
customer self-assesses VAT; the application of self-declaration to B2C transactions is connected
with some complexities of enforcement.186 This is because, firstly, since reverse-mechanism is
181
IMF, “The Federal Democratic Republic of Ethiopia: 2013 Article IV Consultation,” IMF Country Report, No.
13/308, October 2013, P. 27
182
For full details, see National Bank of Ethiopia, “Foreign Exchange Directives,”
<http://www.nbe.gov.et/pdf/Consolidated%20Forex.pdf. > (Accessed 16 June 2017)
183
Ibid.
184
Interview with Teninet Yibeltie, Customer Service officer at Commercial Bank of Ethiopia, on e-commerce
transactions, July 6, 2017.
185
Interview with Tesfu Techane, Investigation Team Coordinator at ERCA, on e-commerce taxation, July 1, 2017
186
OECD, Report by the Technology Technical Advisory Group (TAG), 2000, P. 52,
<http://www.oecd.org/dataoecd/46/2/1923248.pdf.> (Accessed 28 April 2017)
35
reliant mostly on the honesty of the recipient, private customers (legal person) probably have
stronger incentive to avoid tax collection than business customers. 187 Especially, when a consumer
purchases a good or service over the Internet and accepts electronic delivery of that good or service
by downloading it onto his PC, it do not go through the mails or customs, as a result they
essentially avoid import VAT.188 The situation is further aggravated by the fact that, the Tax
Authority of Ethiopia does not have effective mechanism to detect and control supplies of
electronically supplied services, hence, customers' tax avoidance will substantially increase. 189
Secondly, the VAT proclamation provides, by adducing the invoices, an incentive for businesses
to compute input VAT credit for their purchases or expenses. Nonetheless, the incentive is not
present in purchases by final consumers as the latter generally do not have the option to deduct
their expenses for tax purposes or claim input VAT credit. Moreover, while business are better
aware about tax obligations and often have educated manpower for carrying out tax tasks, some
customers stay ignorant in this respect.190 This has the effect that Ethiopian consumers can buy
imported digital goods or services without paying VAT. Thus, despite the advantages of simplicity
in realization, for B2C e-commerce private customers' self-assessment is not supported as the
reliable method of tax collection neither by the EU, nor by the OECD as well.
When looking at the current practice, it is revealed that the main problem against an effective VAT
system for international e-commerce transactions in Ethiopia is the lack of attention to the taxation
of e-commerce transactions as a unique concept and the lack of unique policies to regulate the
sector. 191 From questions posed to the ERCA officers, it emerged that there was a lack of proper
and adequate resources, specialized human resource and institutional setup within the Tax
Authority to monitor the taxation of e-commerce.192 The problem for enforcement in e-commerce
taxation were also raised due to the absence of tough integrated efforts of ERCA with the major
stakeholders such as Information Network Security Agency (INSA), Ethio-telecom and Banks in
tracing the requisite e-commerce transactions. Consequently, with regard to the practical side of
the problematic VAT issues the study established that theoretical soundness of the prospective
187
Interview with Endalelign Asrat, Tax Payers Education and Support Team Coordinator at ERCA, on e-commerce
taxation, July 1, 2017.
188
Ibid.; Interview with Getachew Dilu, Law Enforcement Process Coordinator of ERCA, on the enforceability of
Ethiopian VAT law on e-commerce, July 1, 2017.
189
Ibid.; Interview with Tesfu Techane, Supra note 185. There is also no existing process to accurately verify
ownership or the location of the beneficial owner of the website. Therefore, the potential for tax evasion through e-
commerce in Ethiopia is very high.
190
Interview with Endalelign Asrat, Supra note 187.
191
Interview with Tesfu Techane, Supra note 185.
192
Interview with Endalelign Asrat, Supra note 187, Interview with Getachew Dilu, Supra note 188.
36
proposals would not in itself suffice for the implementation thereof. Given that electronic
commercial activity has been evolving with the development of technology, its regulation and
implementation should also be technology-based.
On this basis, it could be argued that in practice some of the e-commerce websites are not comply
with the laws and regulations of the VAT proclamation. This is due to the fact that several number
of e-commerce websites in Ethiopia do not issue VAT invoices for all taxable e-commerce
transactions. This means that the tax collected by taxpayers is not paid to the Tax Authority which
result in the loss of tax revenue for the government.196 The situation is further aggravated by the
fact that the authority is incapable to identify and control e-commerce business that are non-
compliance with the VAT laws. On the other hand, an electronic invoice system that could form
the basis of claiming an input tax credit for VAT paid in e-commerce transaction is not indorsed
in Ethiopia, thus hindering the opportunities for businesses to reduce their costs of transactions
conducted via internet.197
193
Tait A., Value Added Tax: Administrative and Policy Issues, International Monetary Fund, Washington, D.C.
1991, P. 279.
194
Ibid.
195
VAT Proclamation 2002, Supra note 10, Art. 22(1).
196
But, it is good to note that the actual revenue losses associated with e-commerce transactions are difficult to
estimate as there are currently no empirical studies that attempt to measure these losses.
197
Interview with Fisha Assefa, General Manager of Mercato.Com, on the application of Ethiopian VAT law on e-
commerce transactions, November 23, 2017.
37
2.7.4. Non-compliance to VAT Proclamation
As per Articles 45 and 46 of the VAT proclamation, failure to register for VAT as per the registration
requirement, failure to issue a tax invoice, failure to maintain recorder such as original tax invoices
received and a copy of tax invoices issued and failure to file timely return shall be liable to
administrative penalties ranging from a fine 100 percent of the amount of tax payable and a fine of up
to 50,000 Birr.
Apart from administrative penalties tax offenders such as tax evasion, making false or misleading
statement and failure to notify are all criminal offences under Ethiopian law. Accordingly, tax
fraud - making false or misleading statements is punishable with a fine ranging from 1000 Birr to
100,000 Birr and an imprisonment ranging from 3 years to five years where the making of false or
misleading statement is made knowingly or recklessly such an offence is punishable by a fine of
up to 200,000 Birr of an imprisonment of up to 15 years. 198
Taking into account the above rules, in practice measures taken by the ERCA to control and punish
e-commerce business for their non-compliance is minimal. Some of the reasons for taxpayer’s
compliance problems are: less attention given to taxation of e-commerce; the absence of strong
controlling system against the frauds and evasions performed by some non-compliance e-
commerce websites; the deliberate evasion and unlawfulness of e-commerce websites.199
Unlike the traditional ways of commerce, e-commerce transactions have a more anonymous
character, because it can be carried out without papers and pens, offices and warehouses, and even
198
See section 12, VAT Proclamation
199
Interview with Endalelign Asrat, Supra note 187; Interview with Getachew Dilu, Supra note 188.
38
without employees. In such environment, Tax Authorities may not easily verify the products and
services delivered and other details of a transaction concluded over the internet.200 This will create
the most tax favourable condition for the customer to alter or change the documentation in such a
way to pay minimum tax and VAT to the authorities. Besides, e-commerce leaves less of a ‘paper
trail’, such as invoices and receipts, which tax authorities often use to track down and verify
conventional transactions, and even when electronic records are available, they are more subject
to tampering than paper records are.201 Therefore, e-commerce might pose a challenge for the
Ethiopian taxing authorities to verify the details of the transactions and this could lead to a tax loss
for the Government.
However, the issue of inability of tax authorities to verify the details of electronic transactions is
yet to be resolved not only in Ethiopia, but in the U.S. and the EU as well. Absence of reliable
technologies creates the situation when “the opportunities for tax evasion seem endless” 202 and
ensuring tax compliances appears to be a challenging task. Therefore, the development of new
technologies should be conducted, which would allow the Ethiopian tax authority to identify
transactions taking place in internet and guarantee a higher level of tax compliance.
It is important to identify the parties to a transaction in order to determine the relevant tax
authorities and tax legislation that will be applicable. Nevertheless, one of the key attributes of
online transactions is that the identification of the consumer is not easily ascertainable. The
decentralized and global aspect of the internet makes it difficult to discover the identity or
geographic location of economic participants, especially in the B2C type of e-commerce.203 The
anonymous nature of the network, hence, allows taxpayers to leave little evidence of their
participation in economic activity and frustrate attempts by tax authorities to track and audit
taxpayers.
In Ethiopia, neither the VAT Proclamation nor its regulation regulate how the supplier or the tax
authority is supposed to discover the residence of the consumers, which is necessary for the
200
Akçaoglu E., ‘International Taxation of Electronic Commerce: A Focus on the Permanent Establishment Concept’,
2002, P. 127, <http://dergiler.ankara.edu.tr/dergiler/38/287/2615.pdf.> (Accessed 26 April 2017)
201
National Electronic Commerce Coordinating Council (NECCC). Challenges in Managing Records in the 21st
Century, 2004, P. 9-13.
202
Basu S., Global Perspectives On E-commerce Taxation Law, Queen’s University Belfast, UK, 2007, P. 104.
203
Cockfield A., ‘Balancing National Interests in the Taxation of Electronic Commerce Business Profits’, Tulane Law
Review, 1999, Vol. 74, P. 180- 83.
39
application of the VAT rules. This problem is more aggravated, as Mr. Birhanu stated, mostly
because, the parties’ aspiration to provide false details for the transactions that makes the
identification of the details of the transaction and parties by the Tax Authority more difficult.204 In
this regard, the Australian Tax Authority adopted a registration system whereby internet businesses
would have to register their online address (i.e., their Internet Protocol ("IP") address) as well as
the physical location for their main office.205 Similarly, the OECD made substantial findings in this
field. Specifically, it is considered consumer self-declaration, credit card billing address, IP traces
and digital certificates as possible methods to identify the buyer in e-commerce transaction.206
Accordingly, though none of the above methods of identifying the buyer is found to be absolutely
reliable, until a proper solution is found, all those available means, should be used as a temporary
solution to address this problem.
A further problem that relates to the taxation of e-commerce in Ethiopia concerns the notion of
permanent establishment. As noted above, in order to be taxable in a specific jurisdiction, certain
connecting factors need to be present. Accordingly, the VAT Proclamation provides that the supply
of goods and rendering of services is taxable, if it is carried out by a nonresident through a
permanent establishment in Ethiopia or through the internet. 207 Article 2(10) of the Proclamation
defines “permanent establishment” as;
“[F]ixed place of business through which the business of an enterprise is wholly or partly
carried on. The following shall, in particular, be considered to be a permanent
establishment, an administrative office, branch, factory, workshop, mine, quarry or
any other place for the exploitation of natural resources, and a building site or place
where construction and/or assembly works are carried out. ”208
The PE concept refers to substantial physical presence in the country where services are rendered
and goods are supplied. As per Article 2(10) of the Proclamation, a permanent establishment exists
204
Interview with Birhanu Nigussie, officer of ERCA, on the identification of the details of e-commerce transaction,
May 9, 2017; unfortunately, even if the VAT Proclamation offered acceptable sanctions, practical implementation
thereof would still be impossible. Namely, the Tax Authorities, in order to enforce VAT laws, need to identify the
infringing persons. In practice, there are a circumstance where the online platform acts as a trading platform rather
than a trader. In this case the online platform’s clients are various sellers who own the inventory of goods and advertise
their goods on the online platform. However, the ultimate sale of the goods is completed between the third party seller
and the end consumer.
205
Australian Tax Office, Tax and The Internet, Discussion Report of the ATO Electronic Commerce Project, 1997,
<http://downloads.ato.gov.au/content/business/downloads/ECOM_P1.rtf> (Accessed 24 March 2017)
206
OECD, Supra note 75, P. 5-7
207
VAT Proclamation 2002, Supra note 10, Art. 4(7).
208
Id., Art. 2(10).
40
where an enterprise has a fixed place of business located in Ethiopia. Hence, the enterprise must
carry on business in Ethiopia through a fixed place. Here, the term “fixed” implies a certain degree
of permanence as opposed to temporary. In other words, the place of business is 'fixed' such that
it is established at a distinct place with a certain degree of permanence.
In the conventional type of commerce, the PE concept provided by the VAT Proclamation can
easily be applied but not in the case of e-commerce where the function of e-commerce is based on
the application like web page, server, computers and cable.209 Because, in e-commerce, traders can
sell their products or services in a non-resident state even without the physical presence or establish
a permanent establishment. Therefore, the premise of the permanent-establishment rule-that is, to
conduct business in a country, you need a presence there-does not always necessary to e-commerce
transactions. Besides, the concept of “fixed place” in PE is difficult to apply in e-commerce
because companies can be located anywhere and can conduct business everywhere. 210
The question this raises is whether a website or a server, owned or used by a foreign company
alone can constitute a permanent establishment. As per the revised commentary to Art. 5 of the
OECD Model Tax Convention, a non-resident enterprise with an internet web site alone would not
be regarded as having a PE in the jurisdiction of its consumers.211 This is based on the premise that
a place of business test requires some physical existence in the source country. However, a website
is not a tangible object, and therefore it cannot be a place of business. 212 Conversely, the server,
being a physical object, can constitute a place of business.213 Apart from the possibility that a server
may be a place of substantial equipment, the room where the server is located would satisfy the
concept of place of business.
In a nutshell, in the Ethiopian VAT Proclamation, the traditional concepts contained in the
definition of a permanent establishment are inadequate to deal with the ever-increasing growth of
e-commerce in the digital era. In this context, it is therefore of utmost importance that a solution
209
Barrett S., ‘International Taxation of Electronic Commerce Income: A Proposal to Utilize Software Agents for
Source-Based Taxation’, Santa Clara High Technology journal, 2000, Vol. 16, Issue 1, P. 117.
210
Rifat A., ‘E-Commerce Taxation and Cyberspace Law: The Integrative Adaptation Model’, Virginia Journal of
Law &Technology, 2007, Vol. 12, No. 5, P. 9. This may also have a devastating effect in applying the provisions of
the Proclamation like Art. 18(8) (a) that requires fixed place of abode or business.
211
OECD, Clarification on The Application of The Permanent Establishment Definition In E-Commerce: Changes To
The Commentary On The Model Tax Convention on Article 5, 2000, P. 3,
<http://www.oecd.org/dataoecd/46/32/1923380.pdf> (Accessed 8 May 2017)
212
Id., P. 5, Para. 42.2.
213
Arvid S., ‘Erosion of the Concept of Permanent Establishment: Electronic Commerce’, Intertax, 2000, Vol. 28.
No. 5, P. 189.
41
is developed to address the limitations of the present construction of the permanent establishment
principle.
The fact that lack of uniform global legislation for regulating cross-border e-commerce taxation is
a big impediment in itself. This means that different countries apply different standards when
applying e-commerce tax law rules.214 This may results in double taxation. ‘Double taxation’ has
been defined as “the imposition of comparable taxes in two (or more) states on the same taxpayer
in respect of the same subject matter and for identical periods.” 215 This therefore implies that
double taxation treaties have an importance role to avoid double taxation. In Ethiopia, most tax
treaties were created for income tax purposes. Indirect taxes such as VAT are usually left out of
the multilateral and bilateral treaties between Ethiopia and other countries and this will create
challenges to apply the existing VAT rules on e-commerce. In this respect, OECD, to minimize
the risk of double taxation or under-taxation, develops international VAT guidelines as an
international standard for cross-border trade. These guidelines are based on the principles of a
“good tax” namely neutrality, efficiency, legal security, simplicity, equity, and flexibility.216
Consequently, in order to avoid issues of double taxation or non-taxation, the future tax treaties
should be created for VAT purpose and take account of changes relating to taxation of e-commerce
transactions.
Moreover, enforcement measures and penalties for non-compliance granting ERCA extra-
territorial powers, would have to be developed. These powers will not be enforceable unless tax
treaties are in place between Ethiopia and the country in which the enforcement measures are to
be imposed. Bilateral and multilateral treaties to realize the application of Ethiopian VAT law on
cross boarder e-commerce transaction would, therefore, have to be negotiated.
3.7.5. Keeping Records
In business, traders are expected to maintain proper accounts and records as may be prescribed by
the Tax Authority, so that they can have the required material as needed. Otherwise, it is difficult
to properly manage the incomes and expenses of the business operation. To put it in a context,
“Jurisdictions are encouraged to allow the use of electronic record keeping systems, as business
214
Vann R., ‘International Aspects of Income Tax’, International Monetary Fund, 1998, Vol. 2,
<https://www.imf.org/external/pubs/nft/1998/tlaw/eng/ch18.pdf> (Accessed 23 April 2017)
215
Ibid.
216
Van der Merwe B., Supra note 39, P. 389.
42
processes have become increasingly automated and paper documents generally have been replaced
by documents in an electronic format.” 217 Accordingly, Article 37 of the VAT Proclamation
requires every taxable person to keep records and books of account (which must be retained for up
to ten years) in order to fulfill the requirements of the Proclamation.218 However, in e-commerce
transactions or when the taxable person engaged in the sale of electronic goods or services, no
paper records are likely to be created. In such cases, the only record that exists could be an
electronic one. This creates the possibility for taxpayers to engage in tax evasion and fraud because
computerized records can be altered without a trace. Correspondingly, in Ethiopia, guidelines
regarding acceptable records or documents where goods are delivered, invoices issued and
payments made electronically are not issued.
217
OECD, International VAT/GST Guidelines, 2015, P. 53,
<http://www.oecd.org/ctp/consumption/international-vat-gst-guidelines.pdf> (Accessed 12 May 2017)
218
VAT Proclamation 2002, Supra note 10, Art. 37.
43
CHAPTER FOUR
4.1. Conclusion
The thesis discussed the various aspects of taxation of electronic commerce. In doing so, it tried
to show how the existing legal regime relating to VAT in Ethiopia will be applicable for taxation
of e-commerce. Accordingly, it is demonstrated that the legislation currently in place in Ethiopia
is applicable to e-commerce transactions. Nonetheless, it has seen that there are many practical
questions that do not find answers in the current VAT structure. In practice, e-commerce taxation
especially for VAT purpose is not given due attention. Correspondingly, it emerged that there was
a lack of proper and adequate resources, and their usage, within the Tax Authority to monitor the
business. Similarly, including the absence of legal framework for completing an electronic
business, lack of effective online payment system currently working in the international level, and
stringent foreign exchange regulations are important barriers to the development of e-commerce
in Ethiopia. As a result of that, the state continues to lose potential tax revenues from this sector.
Moreover, the paper revealed the possible challenges posed in taxation of VAT on e-commerce
under the Ethiopian VAT system. In view of that, the tax collection method of reverse-charge
mechanism is inefficient to address situations where digital content was supplied to customers in
Ethiopia. Because, it is mostly reliant on the honesty of the taxpayer to declare all imported e-
commerce transactions that were incurred. This is challenging to control for the Ethiopian Tax
Authority, and this may lead to tax evasion and the erosion of the tax base. Moreover, the research
has shown that, the VAT system of Ethiopia does not have an effective mechanism to solve the
problem of the buyer’s identification, establishing his location/residence and its statues (business
or consumer). Similarly, it remains unclear how merchants could ascertain information about the
buyers and how Tax Authority could trace electronic transactions. The traditional definition of PE
which is provided in the VAT Proclamation is also inadequate to deal with the ever-increasing
growth of e-commerce transactions. Accordingly, the criteria of ‘fixed place of businesses’,
appears impractical since in e-commerce business can be placed and conducted anywhere without
having any fixed place. It is correspondingly established that the VAT Proclamation does not give
a clear provision as of whether websites or server is a permanent establishment that is subjected to
tax. Another setback identified in this paper is that Ethiopian tax treaties which address the problem
44
of double taxation does not give much concern for VAT. There is also no guidelines developed by
Ethiopian Government as to acceptable records where goods are delivered, invoices issued and
payments made by electronic means.
In general, it is found that the current Ethiopian legal system is not effective enough for the
application of VAT on e-commerce transactions. Thus, the government of Ethiopia might need to
take into account those problems that are experienced and adjustments implemented by the other
jurisdictions and how the existing VAT legislation is lacking in realizing VAT on e-commerce
transactions.
45
4.2. Recommendation
Following the above conclusion, the study has forwarded the following major recommendations,
which, if implemented, may ameliorate the gaps of the existing VAT regime on the realities of e-
commerce. Thus,
The tax rules should be clear and simple to understand so that taxpayers can anticipate the
tax consequences in advance of a transaction. Hence, it is endorsed to extend the definition
of “rendition of services” contained in Article 4(1) (b) of the VAT Proclamation by
including a statement that the term “services” includes “electronically supplied services”.
Furthermore, it is better to provide for the list of services covered by the term “electronic
supplied services” taking the indicative list contained in the EU Council directive
2006/112/EC/ as the guidance.
A clear provision on whether web sites and/or servers will be considered to be permanent
establishment should be issued.
As for B2C transactions, rules need to be established, which would prevent foreign
suppliers from escaping taxation in Ethiopia. It is advisable to establish a special scheme,
which would require foreign vendors involved in suppling electronic services to Ethiopian
consumer to register (a simplified registration process accompanies this new requirement)
and report in the Ethiopian Tax Authority for the purpose of remitting VAT.
To resolve the problems of identification of the identity and location of the parties, certain
methods should be designed. Hence, the Ethiopian Tax Authority should investigate ways to
verify and obtain accurate information as to the party’s identity and location. Particularly, the
use of technologies for tax administration and collection should be used towards
identifying not just the parties but also other details of the e-commerce transactions thereto.
Better collaboration and networking between government departments like INSA,
Telecommunication, and ERCA is required so that the presence of online businesses can
be monitored. This cautious step of the Tax Authority should be made to work together
with such group of actors in order to disclose e-commerce transactions that take place
within their networks. In doing so, there is need to develop a comprehensive human resource
development programme and create an awareness to all stakeholders including ERCA
officers and taxpayers on conception of e-commerce taxation. This should be done in
different conferences and trainings.
46
The Government of Ethiopia should have inked bilateral agreements to address the
challenges on the international taxation of VAT arising from e-commerce. This will have
its own positive impact on the revenue potential of VAT and to realize enforcement of the
VAT legislation.
An efficient international cooperation that assist the administration of VAT is key aspect
in e-commerce situation. Unless such cooperation is forthcoming, e-commerce will cause
a potential erosion of tax base for the government. To ensure such co-operation it will be
necessary to create separate unit within the Tax Authority for information exchange. Broad
consensus on the type of information to be exchanged and compatibility in laws relating to
banking secrecy would assist in preventing erosion of tax base.
To modernize the existing VAT system, it is important to ensure the principles of taxation
which include neutrality; efficiency; certainty &simplicity, effective &fairness; as well as
flexibility are adhered to, so as to avoid distortion in the economy. Yet, in realizing the
above suggestions, having a holistic approach with a sound assessment and enforcement
procedure is very imperative.
What is more, this research has attempted to provide a baseline on the application of the
current VAT system on e-commerce transactions. Taxation of e-commerce through income
tax law regime was not exploited in this research. Therefore, studies should be carried out
on the application of Ethiopian income tax laws on e-commerce transactions.
47
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ess.pdf> (Accessed 17 January 2017)
National legislations
Council of Ministers Value Added Tax Regulations, 2002, Federal Negarit Gazeta, Reg.
No. 79/2002, 9th year, No. 19.
55
Sales and Excise Tax Proclamation, 1993, Federal Negarit Gazeta, Proc. No. 68/1993, 52
year, No. 61.
Value Added Tax (Amendment) Proclamation, 2008, Federal Negarit Gazeta, Proc. No.
609/2008, 15th year, No. 6,
Value Added Tax Proclamation, 2002, Federal Negarit Gazeta, Proc. No. 285/2002, 8th
year, No. 33.
56